Losses on non-agency residential mortgage-backed securities are predicted to increase as issuance remains flat. But an improvement in RMBS delinquency is forecasted.
The backlog of foreclosures is driving down home prices and driving up losses on private-label RMBS, according to Moody’s Investors Service. The foreclosure affidavit crisis has added three six months to the foreclosure process, and corrective actions by servicers — as well as heightened scrutiny by borrowers and judges — are adding costs to the process.
Which servicers will bear the most costs, and how much of the costs will be passed onto RMBS investors, will become more clear as the new year progresses.
“However, given already high loss expectations on RMBS pools, and assuming servicers bear the costs of their malfeasance, these delays and higher costs will not have a material impact on our expected recoveries,” Moody’s Senior Analyst Amita Shrivastava said in a news release.
Cumulative losses for subprime pools issued between 2005 and 2008 increased to 14.9 percent in November from 11.8 percent in December 2009. On option-ARM issuances, the loss rate climbed to 9.5 percent from 5.7 percent, while Alt-A pools saw losses rise to 7.9 percent from 5.2 percent. The rate rose to 1.4 percent on jumbo pools from 0.6 percent.
But delinquency on non-agency securities is expected to decline, Moody’s said in its 2011 outlook. The decrease in delinquency will be fueled by Treasury Department pressure on loan servicers to provide loan modifications with principal reductions –something servicers have been reluctant to do.
The New York-based ratings agency predicted that proposed changes to Fannie Mae and Freddie Mac as well as implementation of new legislative and regulatory rules for securitizations will limit RMBS issuance. Regulatory changes, such as a 5-percent skin-in-the-game requirement, will also hold back issuance. In addition, as long as the government continues to maintain the $729,750 limit on super-conforming loans — demand for private-label jumbo securitizations will be deflated.
Securitization costs are expected to increase as a result of new requirements for governance mechanisms and asset verifications.
“The transactions that do come to market will likely have a very strong credit profile as a result of high quality assets, an increased alignment of interest between issuers and investors, increased disclosure of collateral and structural information, and structural mechanisms to monitor and enforce breaches of representations and warranties,” according to Moody’s Analyst Todd Swanson.
